Supreme Court Ruling Deals Blow to P2P Firms

Serving a victory to the entertainment industry and a potentially damaging blow to peer-to-peer (P2P) file-sharing firms, the U.S. Supreme Court today ruled that P2P firms can be sued if they encourage the use of their products to illegally swap copyrighted music and movies.

The unanimous court ruling in the case of Metro-Goldwyn-Mayer Studios v. Grokster Ltd. was handed down this morning, on the last day of the court’s current session. Lawyers said the ruling upheld the core of the famous 1984 Sony Betamax case, but many in the technology sector said it left many unanswered questions and would likely lead to additional legal wrangling.

“The ruling is going to unleash a new era of legal uncertainty on America’s innovators,” Fred von Lohmann, senior staff attorney for the Electronic Frontier Foundation (EFF), said. “By focusing on intent, the Supreme Court has opened the door for lawyers to sue to see the minutes of engineering meetings, the drafts of marketing plans and internal e-mails. That’s an expensive proposition.”

Evidence of Inducement

The technology industry, by and large, had hoped for a clear affirmation that the precedent set by the Betamax ruling, which said that a technology creator could not be held liable for the actions of end-users if a device had substantial legitimate uses, would be extended to the Internet.

However, the court said that the current cases were different because there was “substantial evidence” that P2P firms had induced users to illegally copy and share copyrighted material.

“We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties,” Justice David H. Souter wrote.

The decision overturns an appeals court ruling, sends the case back to the lower court and clears the way for copyright holders in the music and film worlds to sue firms such as Grokster and its parent company, StreamCast; Morpheus; eDonkey and others for the piracy committed by users of their P2P networks and software.

Andrew Greenberg, a spokesman for the IEEE, the electrical engineering industry group that had filed an amicus brief in the case, told the E-Commerce Times that it will take time before the ruling’s exact ramifications will be clear.

“The bottom line here is what should the rule be?” he said. “Technology companies say if there is a non-infringing use, they can’t be held liable. The entertainment industry said they want to be able to hold firms liable in any instance. Neither test serves the public interest.”

Too strict a rule will squelch innovation, while too loose a rule will erode the value of intellectual property. The IEEE, Greenberg said, argued for a balanced approach that used a test such as whether a firm encouraged infringement.

More To Come

“By adopting a balance, they ensure that the mere distribution of technology is not going to create a liability,” he added.

The onus for deciphering whether a P2P firm encouraged or inducted infringement will now shift back to lower courts, where another round of legal battles will ensue. The focus will likely be on how such services and software was marketed to users or whether a P2P firm took any steps at all to curb illegal swapping once it became aware of it.

“There is substantial evidence in MGM’s favor on all elements of inducement,” Souter wrote about the Grokster case.

In a conference call with reporters, Richard Taranto, of the law firm Farr & Taranto, who argued the case before the Supreme Court, said the court ruling contains a “lack of clarity” on how the case should be considered going forward.

“It’s premature to say what it will mean for Grokster, Taranto said. “On first reading, we think we will have the evidence to dispel the inference that the entertainment companies have the right to try and prove what the court said would be sufficient liability.”

“They have given technology companies a very difficult roadmap to follow,” he added. “The impact for the technology industry as a whole will be seen to be a chilling one.”

Michael Weiss, the CEO of StreamCast, said he was “confident” the company would prevail in the end in the legal battle. “The David versus Goliath battle will continue and we’ll stay in this and fight,” he added.

Other Impacts Seen

In the long run, one possible result of the ruling might be fewer lawsuits against individuals. The Recording Industry Association of American (RIAA) and its Hollywood and foreign counterpart had taken to suing hundreds of users in the U.S. and overseas.

The campaign was seen by many to be working, with file-sharing use dropping, but was also extremely costly to the industry not only in financial terms but in a public relations sense. The suits might continue in the near-term, however, as many observers expect the Grokster case to spend months more in court before a clear precedent is available to pave the way for future legal action.

Von Lohmann joked that the ruling appeared to be certain to “be a big boost to lawyers.”

Jupiter Research analyst Michael Gartenberg agreed, calling the ruling a “major victory for the content companies. I’d look for an increase of lawsuits here. Now’s the time for these folks to get together with the hardware vendors and start showing that there are legal alternatives for those who seek them.”

Also boosted will likely be legitimate P2P networks that work with movie studios and music labels to present a forum for legal swapping. At least one analyst predicted that Apple and its iTunes music store platform would be major beneficiaries.

Piper Jaffray said Apple would be the “primary beneficiary” of the ruling, because it already controls some 70 percent of the legitimate download business. “We believe a decision against P2P file sharing would be positive for online content distribution companies, as a slowdown in P2P activity would likely lead to a pick-up in sales for legitimate online content providers,” the firm wrote.

The mixed ruling might also prompt Congress to act. Lawmakers have been debating the INDUCE Act since last year, a law that could explicitly spell out ground rules for device makers to follow to avoid inducing infringement of copyright.